A few weeks ago, I had a call with a reporter from a major publication. She was trying to get educated on innovation in the construction industry. For a person who is not in the industry, it all sounds like a bunch of jibberish. Talking to people outside of your industry and explaining all the players and jargon is a great exercise in clarity.
So let’s get clear: the goal of putting a label on a tech-related industry is typically to simplify messaging. It doesn’t necessarily mean that the market or technology attributes are unique. PropTech, for instance, is a newly created buzzword. It is not actually a category, but just a descriptor of the market that the technology serves. Or look at how the dot-com created the e-class: e-commerce, e-consultancy, etc. But that was over 20 years ago. We are now tech-class. And the reality is: what was considered high-tech 20 years ago may be commonplace today. Isn’t e-commerce now just commerce or retail? For outsiders, the buzzwords seem absurd.
As a venture capital firm, we invest in technology companies. On a daily basis, I have to explain that there are certain businesses that are not really “tech” companies anymore (or that never were tech companies). Here are some examples:
Tech-enabled service companies
Applying technology to create new business models doesn’t necessarily make your company a technology company. Creating drone software to inspect buildings is very different from providing the service of flying drones to inspect buildings. The drone software company is a technology company; the drone inspection business is a tech-enabled service company. It’s innovative, but it isn’t straight tech. In this type of business, the capital required for growth is used to buy more drones and hire more salespeople. In contrast, a technology company is hiring more engineers for research and development. Also, the service company does not have a business that is uniquely defensible. The shared scooter business is a service business, not a technology business. This is evidenced by the number of competitors that emerged so quickly.
Marketplaces have been around since the beginning of time. Technology has merely accelerated the ability to establish and transact without friction. A great example of a marketplace is Uber. The fundamentals of Uber are that they match drivers and passengers. They leverage technology to do it well, but they’re still not a technology company. If you study why they raised so much capital, it was to create enough momentum in their marketplace. For a passenger to be interested, there had to be enough drivers. For a driver to be interested, there had to be enough passengers. Most of the capital deployed was for marketing to passengers and drivers. Early on, Uber had to hire their own drivers to create supply. Marketplaces can be great businesses, but scaling requires a ton of capital. A marketplace business is defensible by deploying large amounts of capital to change behavior and gain market share. If Uber starts selling their software to taxi companies, then they are a technology company. Until then, they’re a marketplace. Most shared economy businesses are marketplaces.
Amazon is mostly an e-commerce company. They classify as a technology company because of their AWS business (cloud computing services). In general, by today’s standards, I would not consider an e-commerce company a technology company. Scaling an e-commerce company today is all about marketing, and that’s where the capital goes. If an e-commerce business is defensible, it’s not typically because of unique technology.
Co-living and co-working fall into this category. Buying a product at a wholesale price, breaking it up into smaller orders, and adding some value to the product is a strategy that has been around for ages. WeWork was never a technology company, but rather an arbitrage real estate business. They committed to a lot of space, added value through design and technology, and sold it by the month. This is a very capital intensive business and all about cost and utilization management. Similarly, professional services companies are a labor arbitrage business. A company commits and hires a person on payroll, then they bill them to a client by the hour at a profit. If the person isn’t billing, the company doesn’t make a profit. If you pay the person above the market rate, then no matter how busy they are, you may not make a profit. In arbitrage companies, the capital needed to grow goes into buying more product. Arbitrage is not inherently defensible.
In all four cases, you may have noticed a couple common subjects: defensibility, and use of capital. A true technology company should be defensible by merit of the technology itself. The capital required for growing a tech company goes into developing the actual technology. None of these four company-types fit that description. Not being a technology company is not a horrible thing; it just means that a tech-focused VC will likely not be interested.
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